Deflected repeated fades dominated this Ides of March session Thursday. Several stabs tried to knock...
The Challenge of Vulnerability
08/29/2011 10:06 am EST
Sometimes it takes a catastrophe to make you aware of just how vulnerable you are, writes MoneyShow.com personal finance expert Terry Savage.
One big lesson: The midst of a hurricane, whether financial or weather-related, is not the time to begin preparations. You need to recognize potential risk well in advance of the disaster—and be as prepared as possible.
It’s scary to look at our own vulnerabilities. While you don’t want to obsess over things you cannot control, you do want to be as prepared as you can. But while preparation can mitigate the impact of the weather, it can’t turn back the forces of nature.
We live in a modern society, which is possible because things “work.” In fact, our infrastructure works so well that we tend to take it for granted. We assume that the basic necessities of life will be provided for us—clean air to breathe, good water to drink, heat (or air conditioning) to make our homes bearable.
And above all, we rely on electricity to facilitate all of those necessities—and communication.
It’s only when we are temporarily without these basics that we give them much thought. And then we realize that we don’t have as much control as we think we have.
We Aren’t in Control
Even while CNN can cover a natural disaster with reporters standing against the wind, we are forced to begrudgingly accept that, despite all our technology, we can’t control the weather. No government agency, no media coverage, and no united protest will give us the power to change this inexorable force of nature.
Why, then, are we so confident that we can control the forces of economics? Why do we believe that mere mortals can control economic cycles, which are natural forces arising out of human emotions and desires?
Over the past few hundred years of modern civilization, many have tried to control economic cycles. And all have failed. The old USSR tested the concept of Marxist government control to death. Each year brought a new five-year plan—and more shortages of food and consumer basics.
The belief that there is a way to control—or end—economic cycles is the ultimate hubris. Yet, after a period of good economic times, there is always the mistaken belief that the cycle is “under control,” along with the irrational belief that the good times are destined to last forever because “this time things are different.”
It is that delusion that is most costly—because it leads us to believe that someone else is responsible for our economic misery, and even worse the belief that someone can “cure” our economic malady.
Millions of people today are still living without power as a result of the weather. They are not casting blame, for they recognize that the real challenge is to deal with the immediate necessities.
Similarly, millions of Americans have been out of work for two years or more. Our political process almost guarantees that blame will be cast, fingers will be pointed. But it is as fruitless to waste our time on economic blame as it is to shout at the heavens.
NEXT: The Inevitability of Risk|pagebreak|
The Inevitablity of Risk
We do risky things. We build a portion of New York City on landfill that is barely above sea level—and it works, for a long time. Until it doesn’t. (We barely missed seeing what happens when it doesn’t work, as Irene created only a wading pool in lower Manhattan, not a horror movie.)
We built levees in New Orleans that were designed to weather only a category 3 hurricane, knowing full-well that a category 5 hurricane could occur. They built nuclear plants in Japan, not taking into account the very long-shot possibility of a tsunami sweeping inland.
When we do risky things, we take calculated risks. You do that when you get in a car to drive to work, or on a plane to go on vacation. Life is not without risks, and we accept that.
Yet, when it comes to our economy, we blindly believe that risk can be limited by either smart people in charge, by government bureaucrats (they are not the same)—or by our own good luck.
We ignore risk—or worse, we think that we are invulnerable, because someone else will free us from the consequences of economic risks that are as inherent as weather risks—and perhaps even more predictable.
And because we ignore economic risk in this belief that it can be controlled, we are all the more devastated when the consequences arise, because we have not prepared for the risk. We believed that good times would go on forever, so we did not save for the tough times.
Then, when the bad times come, we learn our lesson. Sadly, it seems that this lesson of economic cycles must be re-learned by every generation that has not felt the impact of the cycle. At least, that’s what the Russian economist Kondratieff theorized when he recognized a series of economic boom-and-bust cycles lasting approximately 57 years.
The good news is that every major downturn creates the seeds of future economic growth in the next up cycle. Debts are erased, liquidity increases—and new and creative inventions are spurred, ready to take hold in the coming upturn.
But just like the tides of wind and water, you can’t stop these natural phenomena. You can only learn from history—and be as prepared as possible for the future. And that’s The Savage Truth.
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